BLOGS: Financial Services Litigation

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Thursday, October 20, 2011, 8:48 AM

Citigroup Settles With SEC

Posted by: Chris Jones


Yesterday, the SEC and Citigroup reached a $285 million settlement amid allegations that a Citi-owned broker-dealer had duped investers into a $1 billion off shore deal involving collateralized debt obligations ("CDO"). As reported here, CDOs are bundles of bonds that are tied to the performance of mortgages and other loans.


CDOs are one of the many financial products that performed well when the real estate market was booming but abruptly tanked when the market turned in 2008 and 2009. They are credited with being one of the market creations that nearly destroyed the global financial system. Are we still feeling the effects on a global scale? Ask Greece . . . or Portugual . . . or Britain for that matter.


From a legal perspective, Citi's problem wasn't that it sold a product that ultimately failed. It's problem, as alleged by the SEC, was that it used a subsidiary in marketing the products to its investors in order to give the appearance of an arms length transaction, and then Citi bet against the investment. In short, it was a "win-win" for Citi, which is not information that its investors were given.


With this settlement, Citi joins Goldman Sachs, who last year paid $550 million to resolve SEC charges, and J.P. Morgan Chase, who last year agreed to pay $153 million. To date, over a billion dollars has been paid to settle SEC related charges arising out of banking practices that allegedly contributed to the market melt-down.


Surprisingly, the linked article stops short of reporting that on October 28, 2008, collectively, Citi, Goldman Sachs and J.P. Morgan Chase received approximately $60 billion in TARP funds, which are commonly considered and referenced as a public "bailout." So, one could argue that they have merely repaid 1/60 of that money. Whether or not these settlements should hurt the institutions; whether they do hurt; and whether or not the United States can afford to make them hurt are three questions that continue to be open for debate, but some level of recrimination is happening...and has been for a while. Too big to fail? Maybe. Maybe not. But, necessary? It would appear so.


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